Russia Plans Tax Hike on Businesses, Rich as War Costs Mount

Bloomberg News
·3-min read

(Bloomberg) -- Russia said it plans to raise taxes on businesses and the wealthy, targeting a relatively small number of people in what could prove a popular move as the invasion of Ukraine continues to put pressure on government finances.

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The Finance Ministry plan would introduce a more robust progressive income tax, while the levy on corporate profits would rise to 25% from the current 20%, according to the Interfax news service, which cited a proposal filed to the government.

From 2025, the level of personal income tax for the highest earners would increase to 22% from 15% currently. Levies on the extraction of iron ore, potash and phosphate fertilizers would also rise. The entire package would raise an additional 2.6 trillion rubles ($29.2 billion) in 2025, with over a half of that coming from the higher corporate tax, according to Interfax.

In 2020, Russia canceled its flat tax on personal income, instituting a policy where individuals with an annual income of more than 5 million rubles per year paid a 15% tax instead of 13%. Since the start of the war, the government has imposed additional taxes on business as it wrestled with the costs of the war in Ukraine, but personal income had remained untouched until now. President Vladimir Putin endorsed changes to income tax rates in his February address to Russia’s upper house of parliament, the Federation Council.

“The plan looks like a certain compromise between the government’s intention to increase personal income tax revenues without affecting the interests of the vast majority of the population,” said Olga Belenkaya, an economist at Finam in Moscow.

The personal income tax would affect about 2 million people, or 3.2% of the total workforce, Finance Minister Anton Siluanov said in a statement. Rates would range from the current 13% for those earning as much as 2.4 million rubles a year to 22% for those exceeding 50 million rubles.

Siluanov said the changes reflected a need “for social justice, including for progressive tax rates.” Yet, the tax increases won’t affect dividend payouts or share sales, the major source of wealth for Russia’s richest, The Bell reported. At the same time, troops fighting in Ukraine will be eligible for additional tax benefits.

Meanwhile, the increase in corporate taxes will provide the government 1.6 trillion rubles of extra income, Interfax reported, citing the Finance Ministry.

Read more: Russia’s Post-Election Spending Sends Budget Into Deep Deficit

Businesses welcomed the move as more predictable than the one-off taxes the government has enacted in past years. “As an entrepreneur, I am in favor of increasing income taxes instead of fees and one-time payments,” Russia’s richest man, Vladimir Potanin, told Tass news service last week when asked about the government plan.

“Responsible businesses understand the need for a more equitable redistribution of the tax burden,” Alexey Mordashov, the billionaire owner of Severstal PJSC, said according to Tass on May 24.

Russia has run a budget deficit since the end of 2022, a reflection of the steep costs of Putin’s invasion of Ukraine in February of that year.

“The draft budget included a reduction in spending by 2 trillion rubles in 2025, which looked rather unrealistic. This difference had to be covered somehow,” said Sofya Donets, an economist at Tinkoff Investments. “The option to raise taxes is the most conservative, most balanced in the long-term and most non-inflationary.”

The Finance Ministry said in a statement the proposals have been submitted to the cabinet and could win approval in the lower house of parliament before the summer recess.

(Updates with details from the Finance Ministry, and comments from analysts and businessmen starting from the third paragraph.)

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